January 9, 2020

Global Market Comments
January 9, 2020
Fiat Lux

Featured Trade:

(CCI), (AMT), (SBAC),
(JNK), (SPG), (AMLP), (AAPL), (VZ), (T), (TMUS), (S)

Capturing Some Yield with Cell Phone REITs

I am constantly bombarded with requests for high-yield, low-risk investments in this ultra-low interest rates world.

While high-yield energy Master Limited Partnerships LIKE (AMLP) can offer double-digit returns, they carry immense risks. After all, if the prices of oil drop to $5-$10 a barrel, replaced by alternatives as I eventually expect, all of these instruments will get wiped out.

You can earn 5%-8% from equity-linked junk bonds. However, their fates are tied to the future of the stock market at a 20-year valuation high against flat earnings.

You might then migrate to Real Estate Investment Trusts (REITs) like Simon Property Group (SPG), which acts as a pass-through vehicle for investments in a variety of property investments. However, many of these are tied to shopping malls and the retail industry, the black hole of investment today.

So where is the yield-hungry investor to go?

You may have heard about something called 5G. This refers to the rollout of fifth-generation wireless technology that will increase smartphone capabilities tenfold. Whole new technologies, like autonomous driving and artificial intelligence, will get a huge boost from the advent of 5G. Apple (AAPL) will launch its own 5G phone in September.

5G, like all cell phone transmissions, rely on 50-200-foot steel towers strategically placed throughout the country, frequently on mountain peaks or the tops of buildings. With demand from the big phone carriers soaring, there is a construction boom underway in cell phone towers. There just so happens to be a class of REITs that specializes in investment in this sector.

Cells Phone REITs constitute a $125 billion market and make up 10% of the REIT indexes. They own 50%-80% of all investment-grade towers. They are all benefiting from a massive upgrade cycle to accommodate the 5G rollout. These REITs own or lease the land under the cell towers and then lease them to the phone companies, like Verizon (VZ), AT&T (T), T-Mobile (TMUS), and Sprint (S) for ten years with 3% annual escalation contracts.

American Tower (AMT) is far and away the largest such REIT, with 170,000 towers, has provided an average annual return over the past ten years, and offers a fairly safe 1.65% yield. They are currently expanding in Africa. Even during the 2008 crash, (AMT) still delivered an 8% earnings growth.

SBA Communications (SBAC) is the runt of the sector with only 30,000 towers. However, it has a big presence in Central and South America and is seeing earnings grow at a prolific 80% annual rate. (SBAC) is offering a 1.48% yield at today’s prices.

Crown Castle International (CCI) is in the middle with 40,000 large towers and 65,000 small ones. 5G signals travel only a 1,000 meters, compared to several miles for 4G, requiring the construction of tens of thousands of small towers where (CCI) is best positioned. (CCI) offers a hefty 3.39% yield.

Small cell towers are roughly the size of an extra-large pizza box and will soon be found on every urban street corner in the US. AT&T (T) has estimated that there is a need for over 300,000 small cell phone towers in the US alone.

 So, if you’re looking for a sea anchor for your portfolio, a low-risk, high-return investment that won’t see a lot of volatility, Cell phone REITs may be your thing. Buy (CCI) on dips.

Can you hear me now?







January 6, 2020

Global Market Comments
January 6, 2019
Fiat Lux

2020 Annual Asset Class Review
A Global Vision


Featured Trades:
(SPX), (QQQQ), (XLF), (XLE), (XLY),
(TLT), (TBT), (JNK), (PHB), (HYG), (PCY), (MUB), (HCP)
(FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
(FCX), (VALE), (AMLP), (USO), (UNG),
(GLD), (GDX), (SLV), (ITB), (LEN), (KBH), (PHM)

November 13, 2019

Global Market Comments
November 13, 2019
Fiat Lux

Featured Trade:

(SJB), (JNK), (HYG),

September 20, 2019

Global Market Comments
September 20, 2019
Fiat Lux

Featured Trade:

(TLT), (FDX), (FB), (HYG), (JNK), (EEM), (BABA), (JD), (TBT), (FXE), (UUP), (AMZN), (FB), (DIS), (MSFT), (USO), (INDU),

September 18 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader September 18 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: What would happen to the United States Treasury Bond Fund (TLT) if the Fed does not lower rates?

A: My bet is that it would immediately have a selloff—probably several points—but after that, recession worries will take bond prices up again and yields down. I don’t think we have seen the final lows in interest rates by a long shot. That’s why I bought the (TLT) last week.

Q: Is it good to buy FedEx (FDX) considering the 13% fall today?

A: I use the 3-day rule on these situations. That’s how long it takes for the dust to settle from an earnings shock like this and find the real price. The problem with FedEx is that it’s a great early recession predictor. When the number of delivered packages decreases, it’s always an indicator that the economy as a whole is slowing down, which we know has been happening. It’s one of the most cyclical stocks out there, therefore one of the most dangerous. I wouldn’t bother with FedEx right now. Go take a long nap instead.

Q: Would you be a buyer of Facebook (FB) here, given they seem to have weathered all the recent attacks from Washington?

A: Not here in particular, but I would buy it 20% down when it gets to the bottom edge of its upward channel—it still looks like it’s going crazy. They’re literally renting or buying buildings to hire an additional 50,000 people in San Francisco anticipating huge growth of their business, so that’s a better indicator of the future of Facebook than anything.

Q: Will junk bonds be more in demand now that rates are cratering?

A: Junk bonds (HYG), (JNK) are driven more by the stock market than the bond market, as you can see in the huge rally we just had. Junk bonds are great because their default ratios are usually far below that which the interest rate implies, but you really have to trade them like stocks. Think of them as preferred stocks with really high dividends. When the stock market tops, so will junk bonds. Remember in 2008, junk yields got all the way up to 15% compared to today’s 5.6%.

Q: What will happen to emerging markets (EEM) as rates lower?

A: If lower interest rates bring a weaker US dollar, that would be very positive for emerging markets over the long term and they would be a great buy. However, emerging markets will take the hardest hit if we actually do go into a recession. So, I would pass for now.

Q: What are your thoughts on Alibaba (BABA) and (JD)?

A: They are great for the long term. However, expect a lot of volatility in the short term. As long as the trade war is going on, these are going to be hard to trade until we get a settlement. (JD) is already up 50% this year but is still down 40% from pre trade war levels. These things will all be up 20-30% when that happens. If you can take the heat until then, they would probably be okay for a long-term portfolio globally diversified.

Q: What do you have to say about the ProShares Ultra Short 20+ Year Treasury ETF (TBT)—the short bond ETF?

A: If you have a position, I’d be selling now. We just had a massive 20%, 4-point rally from $22 to $27 and now would be a good time to take a profit, or at least get out closer to your cost. The zero interest rates story is not over yet.

Q: Would you short the US dollar?

A: I would most likely short it against the euro (FXE), which now has a massive economic stimulus and quantitative easing program coming into play which should be positive for it and negative for the US dollar (UUP). That’s most likely why the euro has stabilized over the last couple of weeks. That said, the dollar has been unexpected high all year despite falling interest rates so I have been avoiding the entire foreign exchange space. I try to stay away from things I don’t understand.

Q: If all our big tech September vertical bull call spreads are in the money, what should we do?

A: You do nothing. They all expire at the Friday close in two trading days. Your broker should automatically use your long call position to cover your short call position and credit your account with the total profit on the following Monday, as well as release the margin for holding that position. After that, we’ll probably wait for another good entry point on all the same names, (AMZN), (FB), (DIS), (MSFT).

Q: If the US fires a cruise missile at Iran, how would the market react?

A: It would selloff pretty big—markets hate wars. And the US wouldn’t send one missile at Iran; it would be more like 100, probably aimed at what little nuclear facilities they have. I doubt that is going to happen. The world has figured out that Trump is a wimp. He talks big but there is never any action or follow through. Inviting the Taliban to Camp David while they were still blowing up our people? Really?

Q: Will the housing market turn on the turbochargers after this dip in rates?

A: It wouldn’t turn on the turbochargers, but it might stabilize the market because money is available now at unprecedentedly low interest rates. However, we still have the loss of the SALT deductions—the state and local taxes and real estate taxes that came in with the Trump tax bill. Since then, real estate has been either unchanged or has fallen on both the East and West coast where the highest priced houses are. It’s the most expensive houses that take the loss of the SALT deduction the hardest. Don’t expect any movement in these markets until the SALT deduction comes back, probably in 16 months.

Q: What catalyst do you think would cause a 10% correction in the next 2-3 months?

A: Trump basically saying “screw you” to the Chinese—a tweet saying he’s going to bring another round of tariff increases. That’s worth a minimum of 2,000 points in the Dow Average (INDU), or about 7% percent. Either that or no move in Fed interest rates—that would also create a big selloff. My guess is that and adverse development in the trade war will be what does it. That’s why my positions are so small now.

Q: We have a big short position in the United States Oil Fund (USO) now. Are you going to run this into expiration until October $18?

A: Even though oil has already collapsed by 10% since we put this position on last Friday, premiums in oil options are still close to record levels. So, it pays us to hang on for the time decay. The world is still massively oversupplied in oil and the Saudis were able to bring half of the lost production back on in a day. Oil will keep falling unless there is another attack and it is unlikely we will see one again on this scale. And, we only have 20 more days to go to capture the full 14.8% profit.

Good luck and good trading.
John Thomas
CEO & Publisher
Diary of a Mad Hedge Fund Trader





You Can’t Do Enough Research

January 9, 2019

Global Market Comments
January 9, 2019
Fiat Lux

2019 Annual Asset Class Review
A Global Vision


Featured Trades:
(SPX), (QQQQ), (XLF), (XLE), (XLI), (XLY),
(TLT), (TBT), (JNK), (PHB), (HYG), (PCY), (MUB), (HCP)
(FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
(FCX), (VALE),

(DIG), (RIG), (USO), (UNG), (USO), (OXY),
(GLD), (GDX), (SLV),
(ITB), (LEN), (KBH), (PHM)

September 7, 2018

Global Market Comments
September 7, 2018
Fiat Lux

Featured Trade:
(AMZN), (MU), (MSFT), (LRCX), (GOOGL), (TSLA),
(TBT), (EEM), (PIN), (VXX), (VIX), (JNK), (HYG), (AAPL)

Are Junk Bonds Peaking?

There is no happier corner of the fixed income universe than junk bonds (JNK), (HYG), which have been soaring like a bat out of hell recently.

Average yields for the bond class most sensitive to the economy have collapsed from 18% to near an all-time low of 6.68%, a scant 483 basis points over ten year Treasury bonds (TLT).

If you look at the chart for (JNK) it virtually tracks the S&P 500 one for one, with less volatility, and therein lies the problem. When bonds act like stocks, what happens to bonds when stocks go down?

That is a particularly pertinent question these days as stocks have more than doubled from the bottom, and are approaching grotesquely overbought levels. After a move in the S&P 500 Index?s average multiple from 9 to 19, with 20 a possible top, are junk bonds peaking out here as well?

?A 483 basis point premium does not sound like much compared to the historical range. It is pricing in the near absence of risk in this paper, as if they will live forever? When did I last see this movie? 2006? 2007? Alas, how short memories have become.

It might be worth taking some money off the table here, and taking the hit in the cash flow in your portfolio.

Lowering your beta is prudent, especially if we are about to move from a ‘RISK ON’ to a ‘RISK OFF’ world for more than a day.

Do you really want to wait for the music to stop playing before you grab a chair?



Childrens GameTime to Grab a Chair Before the Music Stops Playing?


Truck Antique

Take a Ride in the Short Junk ETF

When you look at the profusion of new ETF?s being launched today, you find that they almost always correspond with market tops.

The higher the market, the greater the demand for the underlying, and the more leverage traders pay for it. The resulting returns for investors are disastrous.

But occasionally a blind squirrel finds an acorn, and if you fire buckshot long enough, you hit a barn.

That?s why I am getting interested in the ProShares Short High Yield ETF (SJB). After riding the bull move in junk all the way up with (JNK), (HYG), I have recently turned negative on the sector.

Junk bonds have moved too far too fast. Current spreads for junk paper are now only 200 basis points over equivalent term Treasury bonds, and investors at these levels are in no way being compensated for their risk.

If the stock market starts to roll over this summer, then the junk bond market will follow it in the elevator going down to the ladies underwear department in the basement.

Keep in mind that when shorting the junk market, you run into the same problem you have with the (TBT), a leveraged short ETF for the Treasury bond market.

Buy the (SJB) and you are short a 6.74% coupon, which works out to a monthly costs of more than 50 basis points. That is a big nut to cover. So timing for entry into this fund will be crucial.




Car-JunkIs Shorting Junk Bonds the Way to Go??